Taking “Risky” Out of Your Start-Up Business

Starting a new business could be the best decision you’ve ever made... or the worst.

While you’ve probably read about the high failure rate of new businesses, if you have properly assessed the market you plan to enter, are committed to the new enterprise, understand the external factors that can affect it and have developed a comprehensive plan of action – those numbers shouldn’t scare you.

On the other hand, if you dive into your new business without a carefully considered game plan, your chances of success are slim. And if you launch your business expecting it to fail, it probably will.

The trick is to combine your commitment with a well-thought-out plan for starting, operating and growing your business.

Essentials First

If step number one of your plan involves finding a site, selecting a name or ordering business cards, slow down now. The first phase of your plan should focus on assessing:

• The specific kind of business you want to start and everything you can discover about it, including who has succeeded in your market, who has failed, and why.
• Whether you have the commitment – and personality – to actually do this. Starting a business is not like taking up a new hobby or even working full-time within the corporate world. Expect to live and breathe your business until it’s running well – and expect that to take a number of years.
• Possible locations for your new business. Take your idea from the abstract to the concrete by gaining an understanding of the market, including potential customers, likely competitors, barriers to entry, the costs of doing business and economic conditions.
• Your plans to finance the business – with your own funds, by seeking outside investors or by obtaining financing from a bank or other lender.

Next, write your business plan, outlining in detail how you propose to launch, market, manage and grow your business. It should be comprehensive, thoughtful and practical. The details you provide may vary depending on whether you’re seeking debt financing or equity financing.

Of course, if you plan to finance the business yourself, you don’t need to show anyone a formal plan. But you should develop one anyway – it’s the foundation on which you will build your business.

Anatomy of a Business Plan

There is no one right way to write a business plan, but most typically provide:

• An executive summary providing a comprehensive overview of the proposal.
• A detailed description of proposed products and/or services.
• An assessment of both the market and the industry, including demographics, the competition, growth projections, and usage of comparable products and services.
• Analyses of target clients, your planned geographic market(s) and your proposed pricing structure.
• A discussion of how your business model or strategy differs from – and outshines - the competition.
• A look at your promotional strategies, including any contemplated advertising, website plans and projected sales.
• A discussion of your organizational structure – will it be a sole proprietorship, a partnership, a limited liability company (LLC) or a corporation? – as well as of key personnel, project start-up costs and any tangible assets you intend to acquire.
• A comprehensive financial analysis. If you’re not an experienced accountant, work with one to develop realistic projections. Curb your optimism. Being unrealistically optimistic is unlikely to persuade either potential investors or lenders.

Once your business plan is complete, the work has only just begun. But now, with a detailed roadmap in hand, you are at least well prepared to reach your destination.

Selling Your Business:
Taking Stock – Arrangements That Will Serve You Best

If you are considering selling your business – or if the sale is already in progress – you may need to think fast to ensure that the transaction's structure will benefit you in the long term.

If you have not yet agreed to the sale, getting your financial planning in place before the deal closes will add considerably to your flexibility and help you determine how the sale should be structured. If a deal has already been struck, you can still take steps to optimize your situation.

Coming to Terms

Several factors will probably determine the terms, including the structure of your business (e.g., sole proprietorship, limited liability company or corporate structure), the type of assets you are selling (real property and/or business assets), your anticipated tax liability after the sale and any financing obligations you’ve assumed.

As just one example, if you own a C corporation, you may determine that the advantages of a stock sale – helping you avoid double taxation (corporate and shareholder taxes) – outweigh any concerns about the stock’s appreciation potential and restrictions on its sale.

Many small business owners view the sale of their business as their “retirement plan.” If that describes you, make sure the terms of the deal will provide you the consistency and level of income you will need going forward.

To help ensure a clean break and a secure payment, a cash deal might be optimal. However, you should be aware that, while you will get paid, you will likely not get top dollar for your company.

Retaining a Role

Rather than retire right away, you may want to retain a role in the company. If so, one option – assuming no definitive agreement is yet in place – is to sell only a portion of the business, freeing your equity while enabling you to continue to work. Payment could come in the form of cash, stock or both.

Taking the sales proceeds as stock may be your choice if you are willing to assume the associated risk. That course gives you more upside potential should your buyer prosper. Of course, if the company falters, your shares could lose value as well.

Be aware that, by going down this path, you may find yourself holding a concentrated equity position in the buyer’s stock, limiting your ability to sell your shares.

Taxing Concerns

If holding a concentrated equity position doesn’t appeal to you, you might consider negotiating a series of installment payments. In addition to receiving interest on the amount owed, you also may be able postpone paying some of the capital gains tax on the sale. If all goes well, you’ll end up with a higher price. However, you do assume risk, including the possibility that the seller will be late, or even default, on payments.

One way to potentially increase your company’s sale price is through an earn-out. This contractual arrangement establishes a minimum purchase price that will increase if the business reaches specified financial goals within a designated period. However, because earn-outs usually include some sort of employment or consulting agreement, such arrangements may not work for you if your goal is to leave the business entirely.

Whatever your decision, before – preferably considerably before – you sign the final documents, step back and review the agreement in terms of your own financial objectives for yourself and for your family. Only if you are satisfied that the sale is structured in a way that will help you achieve your goals, should you put pen to paper.

If you have questions about what arrangements may best serve your interest, don’t hesitate to call.

New Deferred Compensation Rules Take Effect
January 1

New nonqualified deferred compensation (NQDC) rules under Section 409A of the Internal Revenue Code will take effect January 1, 2009, a year later than originally scheduled when the legislation was passed as part of the American Jobs Creation Act of 2004. The new rules establish patterns that NQDC plans must follow in order to avoid significant tax penalties.

Employers who have such plans must bring them into line with the new rules before the end of the year.

The new regulation redefines deferred compensation as payment that is to be made for a service event that could occur after the year in which the legally binding right to such payment arises. For example, if an employee has the right to a severance package, a deferral of compensation exists. Even if the employee leaves employment and receives such compensation all in the same year, circumstances could have existed wherein the employee leaves service yet receives the severance payment in a different year.

Stock Options and More

Generally, nonqualified stock options and stock appreciation rights are exempt from Section 409A under a variety of conditions including if the stock is related to “service recipient stock.”

Stock earns that definition by conforming to the definitions of publicly traded common stock and may include not only stock of the corporation for which the employee works.

Separation pay plans may be exempt from Section 409A, too, if the separation is involuntary and compensation is payable no later than two years after separation from service.

Nor does Section 409A apply to short-term deferrals, those in which payment is made no later than two and a half months following the end of the tax year during which the compensation is no longer subject to substantial forfeiture risk. This short-term deferral is available only if the plan doesn't specifically provide for payment beyond that two-and-a-half-month period. However, a separation-from-service payment, for example, that could occur in a future year, does not meet the short-term deferral exemption.

If very complicated rules under Section 409A apply to you or your business, and you are concerned about their impact, please don't hesitate to call me.

FDIC Limits Apply To Small Business Accounts, Too

Television cameras at failed IndyMac bank in July focused on individual customers concerned whether they were going to lose their savings. In fact, as long as an account contained $100,000 or less (and up to $250,000 for certain retirement accounts), it was almost immediately available because of the insurance offered by the Federal Deposit Insurance Corporation (FDIC). But what if they were business customers?

That $100,000 FDIC limit applies to sole proprietorships, partnerships and corporations, too. If individuals double as corporate owners, accounts are insured separately. Say you and your spouse keep joint savings, checking and/or money market accounts at the same bank where your corporation has its account. That account is insured to a maximum of $200,000; your business account is insured up to $100,000. Compared to individuals, business owners may find it more cumbersome to maintain accounts – at different banks – that don’t exceed the $100,000 limit.

Small businesses are constantly moving cash into and out of accounts. For the sake of convenience, they’re often all at the same bank with a $100,000 FDIC limit. Dealing with multiple financial partners may be annoying, but under current law, it is the only way to be assured your business accounts are safe in the event of a bank failure.